Flavor of the Month

Vanilla Flavoring, Catalytic Converters, BitMEX, and GPB Capital

Vanilla Flavoring

Back in 2019, a lawyer from New York launched a crusade against food companies. His mission was to hold them accountable for mislabeling their products. His complaint? Food labeled as “vanilla” or “made with vanilla” didn’t actually include any vanilla beans, and was instead made with “natural vanilla flavor with other natural flavors” which tastes just like vanilla.

Look, I believe our consumer protection laws are woefully inadequate and lawyers should sue if they think companies are being dishonest. Do I think that using artificial vanilla flavoring instead of pure vanilla extract is harming anyone? I don’t know. But it makes for entertaining reading:

Legal experts say that while food lawsuits typically come in waves, the vanilla lawsuits are unusual for both their specificity and their sheer number. In 2017, lawyers filed 33 cases over “all natural” claims, and in 2018, 23 lawsuits claiming food packages weren’t full enough, according to law firm Perkins Coie LLP, which tracks food litigation.

There are over one hundred proposed class-action cases over vanilla, which is a lot! Also, unlike most food lawsuits which result in settlements and companies changing packaging, the vanilla cases are mostly being fought in court, with…creative arguments from both sides:

On the other are companies— McDonald’s Corp. , Wegmans Food Markets Inc., Trader Joe’s and Chobani LLC among them—that argue consumers don’t expect to find real vanilla in their vanilla soy milk or vanilla Greek yogurt as long as it tastes like vanilla.

[…]

In court documents asking the judge to toss the case, McDonald’s lawyers argued that vanilla is a flavor, much like Rocky Road or Tutti-frutti. The lawyers included roughly 50 comments on a Facebook post from Mr. Sheehan’s firm as evidence that a reasonable consumer wouldn’t expect real vanilla.

I mean…maybe? I am not sure I buy the argument that products labeled as “made with vanilla” aren’t at least a little misleading. But, when opposing counsel resorts to using comments on a Facebook post to support their claims, they may be on thin ice:

The commenters mostly mocked the post or groused about broken soft-serve machines.

“Anyone else hear their root beer ain’t got any beer in it either??” one wrote. Another pointed out that Goldfish crackers aren’t made with gold. “No Duh!” wrote a third.

I am pleased the epidemic of broken McDonald’s soft serve machines got a mention. Now there’s a real consumer problem! One company so far has settled a suit and agreed to change their labeling which, again, is the typical outcome here. Six cases have been dismissed by courts. That still leaves quite a few of them winding their way through the system.

Do I have a horse in this race? I should probably side with the consumers, who deserve to be told the truth about what’s in their cream soda or yogurt. It would not impact the brands involved to correctly label their products. If you’re buying Vanilla Almond Clusters cereal at Trader Joe’s for three dollars a box I think it’s reasonable to assume you’re not getting freshly harvested bean from Madagascar.

Anyhow, most of the processed food you’re eating that calls itself vanilla is made with artificial flavoring. Surprise! It’s nowhere near as insidious as the fake Chinese honey, but it’s still dumb, and like most dumb things, lawyers are going to make a lot of money arguing about it.

Catalytic Converters

Wikipedia tells me rhodium is a “noble metal” and the New York Times tells me that, along with palladium, it’s a critical element in catalytic converters, which filter dangerous emissions on cars. The combination of stricter emissions standards in the wake of the VW diesel scandal and decreased mining production due to the pandemic have sent metal costs skyrocketing - rhodium is now 12 times the price of gold.

So, naturally, thieves are stealing catalytic converters off cars:

The metals prices, in turn, are fueling a black market in stolen catalytic converters, which can be sawed off from the belly of a car in minutes, and fetch several hundred dollars at a scrapyard, which then sells it to recyclers who extract the metals.

[…]

Nationwide, police are reporting a surge in cases.

While it’s amusing to think about thousands of Americans driving around in extremely loud cars, the Times points out that a thousand-plus-dollar repair is not something a lot of people can afford right now. So, unfortunately, it’s not a victimless crime. Some states are requiring scrapyards and recyclers to check photo IDs before buying used converters. This hasn’t stopped the opportunists:

Online, ads abound of scrapyards willing to pay quick cash for catalytic converters. One site advertised payouts of up to $500 for certain foreign models. Older foreign models tend to contain more of the precious metals than newer ones.

Also, ironically, hybrids are more likely to have their converters stolen, because they tend to be in better condition:

Toyota Prius converters also fetch a higher price because their gasoline engines aren’t in as much use, and so it can take longer for the car to burn out the precious metals.

So! While all of this is bad news, the spike in metal prices may push car manufacturers to phase out combustion vehicles faster - alternative energy cars don’t emit toxic gasses that need more-expensive-than-gold parts to filter out. Also, mining is generally bad, and tends to happen in countries with lousy human rights practices. It’s possible market forces will drive companies to reduce their impact on the environment, which isn’t something you see every day. In the mean time, watch for anyone crawling under your car with a reciprocating saw.

BitMEX

Last week I wrote about Tether, and more specifically about the crazy leveraged bets unbanked crypto exchanges allowed customers to make:

The exchanges who do accept Tether seem to be in on it as well - they offer leverage trading and special giveaways and promotions, meaning that in exchange for real Bitcoins they’ll give you anywhere from 2 to 100 times the amount in Tether to trade.

As it turns out, that was only part of the story. This week I came across this piece in Vanity Fair about Arthur Hayes, co-founder of BitMEX, one of the exchanges referenced in the Tether investigation. Until October of last year it was the highest-volume crypto market on the planet. What happened in October?

At 6 a.m. on the morning of October 1, 2020, FBI agents pulled up to a large colonial in a comfortable Boston suburb. Records show the house had been purchased a year before by a Delaware LLC. The property’s real owner, Sam Reed, was taken away in handcuffs.

Hours later Audrey Strauss, the acting U.S. attorney for the Southern District of New York (SDNY), and William F. Sweeney Jr., head of the FBI’s New York field office, announced the indictment of BitMEX’s founders—Hayes, Delo, and Reed—along with their close friend and first hire, Gregory Dwyer. The men were charged with violating and conspiring to violate the Bank Secrecy Act “by willfully failing to establish, implement, and maintain an adequate anti-money-laundering program.”

Ahhh, yes. Let me back up a bit. In the last few years, Hayes and his co-founders had built a huge, totally unregulated crypto trading exchange, and pissed off a lot of governments and finance titans in the process. How did they do it?

Hayes came from a traditional finance background, and had built ETFs for a bank in Hong Kong before being laid off and diving head first into the world of cryptocurrency. What he did with BitMEX that made it so unique, and so desirable for enthusiasts and amateur traders, was allow people to leverage their currency and trade with it:

BitMEX was billed as “a peer-to-peer trading platform that offers leveraged contracts that are bought and sold in Bitcoin.” It allowed users to effectively bet on the currency’s future price with leverage of up to a dizzying 100 to one. Translation: A customer with $10,000 in his or her BitMEX account could seamlessly execute a trade worth a cool $1 million. The lure of the exchange lay in the fact that people could make big money by putting in relatively modest crypto seed money.

Crazy, right? Not only are shady actors offering crazy exchange rates to get their hands on your Bitcoin, you can then take your crypto to an unbanked exchange and leverage that up 100-to-1 betting on crypto futures. What a world.

It all seems a bit nuts, though it’s worth pointing out that these sort of highly-leveraged trades are not illegal in most countries. Licensed trading desks make highly leveraged bets all the time. You can open RobinHood and buy options on 3X leveraged ETFs. All totally legal! So what happened to Hayes and BitMEX?

The answer is he pissed off someone, though it’s unclear who. The nature of the charges against the founders is…unusual:

The criminal case has stunned legal observers. “I’m not aware—and I’ve done this for a really long time—of any other criminal indictment, and certainly not one targeting individuals, that is solely based on anti-money-laundering-program failures,” maintained Laurel Loomis Rimon, an expert in financial crimes

[…]

“In an indictment you usually see allegations of specific criminal activity, whether it’s fraud, credit card theft, child pornography, terrorist financing. You don’t see any allegation of any of those things in this indictment.”

Interesting! So, the government filed criminal charges against the individuals who ran BitMEX, but only for compliance failures. The author notes it may have been a fishing expedition for the government to get their hands on documents they could use to draft additional charges, but none have been forthcoming.

The civil suit brought by the CFTC against BitMEX appears even more flimsy:

An unregistered exchange like BitMEX, in fact, is allowed to sell leveraged commodities to American retail investors. But it has to complete those transactions within 28 days. The problem is that some of BitMEX’s most popular products—called perpetual swaps—were designed not to expire and to instead allow people to keep their trading positions open. In short, Hayes, Delo, and Reed—three savvy guys with plenty of high-priced legal help—fell prey to a 1936 law, the Commodity Exchange Act.

I mean, a wild, unregulated crypto exchange allowing people to risk huge amounts of money does sound a bit dicey, but it’s impossible to ignore the glaring hypocrisy:

After HSBC admitted to laundering nearly a billion dollars for the Sinaloa cartel and moving money for sanctioned customers in Cuba, Iran, Libya, Sudan, and Myanmar, the Justice Department elected not to indict the bank or its officials, instead having it pay a $1.92 billion fine and install a court-appointed compliance monitor.

That was hardly an aberration. Barclays, BNP Paribas, Credit Suisse, Deutsche Bank, ING, Lloyds Banking Group, Royal Bank of Scotland, and Standard Chartered have all paid fines for conduct that has included money laundering, sanctions violations, and massive tax fraud.

[…]

In fact, 48 hours before the charges against Hayes and his partners were announced, JPMorgan Chase “entered into a resolution”—as it was euphemistically termed—with the DOJ, the CFTC, and the SEC in which the bank agreed to pay close to a billion dollars in connection with two distinct schemes to defraud: one involving precious metal futures, the other Treasury notes and bonds.

Yuuuup. HSBC intentionally evaded money-laundering rules for years, processing payments for some of the most dangerous gangs and terrorists on earth, and not a single person was charged with a crime. JPMorgan Chase has paid $2 billion in fines for money-laundering deficiencies since 2000. No criminal charges.

I find myself unable to root for anyone in this fight - on the one hand, crypto exchanges are used by criminals and money launderers to move funds around the globe. On the other hand, the US government and the banks are targeting upstarts who threaten their iron-fisted control over the global financial system. Everyone in this story kind of sucks!

GPB Capital

A group of states has brought charges against the founders of GPB Capital Holdings, a New-York based investment firm they claim was a Ponzi scheme. Since 2014, GPB took in more than $1.7 billion dollars from over 17,000 investors via four private-equity funds. Was it a Ponzi? Let’s take a look.

Ponzi schemes often attract investors by promising steady, market-beating returns:

In marketing the GPB funds, investors were lured by promises of 8% annual returns with monthly distributions drawn from investment profits, according to the complaints.

They also use aggressive marketing tactics, pushing investors to dump more money in or risk missing out on amazing gains:

While taking advantage of investor hunger for yield in a prolonged period of low interest rates, GPB and Ascendant also came up with a way to create a sense of urgency by offering “special distributions,” according to the Illinois complaint.

“The special distributions were announced in advance, and payable only to those who invested by a stated deadline,” the complaint says. “Ascendant then sent out ‘blast’ e-mails promoting the special distributions and investment deadlines to whip up investor interest.”

Ponzis also tend to target older, less sophisticated investors:

The firm marketed its funds exclusively to accredited investors, as defined under Securities and Exchange Commission rules. But most investments were made through investment advisers who often collected lucrative commissions. In Missouri, for example, the state said 14 firms sold investments in the four GPB funds to 255 investors there, 69% of them 60 years or older…

Yeah, sounds an awful lot like a Ponzi, even without taking into account the evidence that the owners of GPB were draining investor cash to fund their own lavish lifestyles, and forging documents to cover it up.

It’s easy to ask why people invest in these relatively obvious scams, but when you take a step back and see the number of people involved - investment advisors in half a dozen states and private equity firms - it’s understandable that seniors looking for ways to grow their retirement savings end up being taken in by these crooks. It’s yet another indictment of our terrible financial regulators that GPB was allowed to operate for more than 7 years before they were caught.

Short Cons

TechCrunch - “PayPal is shutting down its domestic business in India, less than four years after the American giant kickstarted local operations in the world’s second-largest internet market.”

DOJ - “From their home bases in China, Serbia, and elsewhere, the defendants allegedly targeted investors around the globe – including several in north Texas – soliciting “investments” in binary options and cryptocurrency mining.”

ArsTechnica - “A benign barcode scanner with more than 10 million downloads from Google Play has been caught receiving an upgrade that turned it to the dark side, prompting the search-and-advertising giant to remove it.”

WaPo - “In what the Omaha World-Herald described as potentially “one of the largest individual embezzlements in Nebraska history,” Harbaugh’s ploy bilked nearly $11 million from a bank and four investors.”

Tips, thoughts, or gallons of pure vanilla extract to scammerdarkly@gmail.com